Student Loans: The Most Special of Circumstances.

• Author: Sutton, Kristi Rose

1. INTRODUCTION

   Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), (1) debtors enjoyed a presumption of good faith when they filed for chapter 7 relief. But almost a decade before BAPCPA's passage, credit industry lobbyists began advocating for reforms that would turn this good faith presumption upside down. (2) Some cited to the 2002 statistic from the United States Trustee's Office in which that office touted that it had "prevented the discharge of $59 million of unsecured debt in fraudulent chapter 7 bankruptcies." (3) Eventually, Congress acceded to the credit industry's demands by amending the provisions of chapter 7 to prevent wealthier debtors from shedding unsecured debt when those debtors could afford to repay some or all of their debts. (4) To filter out those debtors Congress thought were abusing the bankruptcy system, it adopted a rigid, mathematical formula, aimed at identifying debtors who had sufficient disposable income to be able to make a meaningful repayment of debt:

   In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter, the court shall presume abuse exists if the debtor's current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv), and multiplied by 60 is not less than the lesser of--

   (I) 25 percent of the debtor's nonpriority unsecured claims in the case, or $8,175, whichever is greater; or

   (II) $13,650. (5)

   Once identified by this formula, the debtors face dismissal of their bankruptcy cases, unless they agree to convert to a chapter 13 proceeding.

   Predictably, using a formulaic approach to detect what is inherently a subjective determination, namely spotting "abuse" of the bankruptcy system, leads to both under- and over-inclusiveness. For example, by permitting the deduction of all secured debt payments, regardless of whether the debtor needs the collateral, the test is underinclusive. It allows wealthier debtors to pass the test and escape detection by deducting payments on such things as boat loans, luxury car loans, and mortgages on lavish homes. (6)

   The test is also overinclusive. Some debtors or their dependents have special needs or circumstances that require them to spend more on necessaries than the means test allows. And sometimes the historical income (7) figure that the statute requires in calculating the income side of the equation no longer represents the debtor's present-day income.

   Fortunately, Congress anticipated that the means test might be overinclusive. It provided a safe harbor in [section] 707(b)(2)(B)(i):

   In any proceeding brought under this subsection, the presumption of abuse may only be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that [sic] justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative. (8) In applying the special circumstances exception, courts have employed different tests. Some courts have interpreted this exception vary narrowly, while others view its application more broadly.

   In this article, we survey the contours of the courts' various interpretations of the special circumstances exception, but we do so with a special focus on how this has been and how it might be used by debtors who are struggling under crippling student loan debt. As many know, most student loans are nondischargeable in bankruptcy, unless the debtor proves that these loans pose an "undue hardship." (9) Bankruptcy courts employ tests to determine "undue hardship" that are extremely difficult to pass. (10) Consequently, debtors with large student loan debt often need to look elsewhere for some relief.

   The "special circumstances" exception could provide the debtor with an opportunity to explain why he qualifies for chapter 7 when the means test would suggest otherwise. (11) If a debtor could use the special circumstances exception to rebut the presumption of abuse, then the debtor could remain in chapter 7, shedding all dischargeable debts, and then emerge from the bankruptcy proceeding in approximately six months with only the nondischargeable debts to address. Otherwise, this same debtor would have to proceed in chapter 13, paying all debts under a five-year plan, after which it would have to continue to repay the student loans and any other nondischargeable debts. To make matters worse, if the confirmed plan does not allow the debtor to make full interest payments on the student loan debts, a debtor could emerge after five years owing more student loan debt than when he began.

   Using the special circumstances exception in this fashion, however, leads to numerous questions. Does the burden of nondischargeable student loan debt qualify as a special circumstance? (12) Does the fact that it must be a "special" circumstance mean that it must be one that is not common to many debtors? Does it require a showing of "exceptional" or "extraordinary" circumstances? Does it have to result from something that was outside the debtor's control?

   Moreover, is there a principled way to differentiate between student loans and other debts? Unlike domestic support obligations, administrative expenses, and certain tax obligations, student loans are categorized as nonpriority, unsecured debt. Consequently, the Code treats them the same as credit card and medical debt. And yet their nondischargeable nature means that they are an albatross following the debtor long after the conclusion of the bankruptcy case. A court could look to their nondischargeable character as a basis for employing the special circumstances exception. But how does a court distinguish between this one type of nondischargeable debt (student loans) and other nondischargeable debts, such as claims for fraud or willful and malicious injury?

   Courts have had to grapple with all these questions and more and, in doing so, have reached different conclusions. In this article, we will explore these questions and the courts' approaches to them. We will also identify the test for the special circumstances exception that we believe most closely aligns with the statutory text, the intent of Congress, and sound bankruptcy policy.

2. CASE LAW: THE DEVELOPING CONUNDRUM

   At bottom, the means test is aimed at discouraging bad faith bankruptcies by malevolent debtors. It is not, however, a "one-size-fits-all" mechanism. It requires a flexibility in its application. Understanding a need for elasticity, the drafters supplemented the statutory mathematical formula with the undefined "special circumstances" provision as a means for debtors to rebut the presumption of abuse. The lack of a definition for the proviso, however, has resulted in multiple judicial viewpoints respecting what qualifies as "special circumstances."

   Perhaps one way to analyze the disagreement is to understand those instances that properly give rise to the "special circumstances" exception. For example, Congress prescribed in [section] 707(b)(2)(B) that serious medical conditions and orders to report for military service qualified under the statute. (13) With that in mind, the conflicting student loan approaches discussed below are drawn into sharper focus.

   1. A STRICT TEST: EJUSDEM GENERIS

      The first collection of cases illustrates a restrictive approach to the phrase "special circumstances." (14) In In re Lightsey, the court analyzed whether the debtor's vehicle loan deficiency amounted to "special circumstances." (15) While the case did not tackle student loans, the analysis represents a rather rigid evaluation of what might qualify as "special circumstances."

      1. In re Lightsey

         In re Lightsey involved a recently divorced debtor who was unable to pay her car loan; she faced an imminent repossession and a corresponding deficiency. (16) The debtor remarried, but remained unable to pay the debt. When the deficiency creditor garnished her wages, the debtor petitioned for relief under chapter 7. (17) As a result of the combined income of the debtor and her new spouse, the presumption of abuse arose. (18) The court noted that the presumption could only be rebutted "by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that [sic] justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative." (19)

         Following an explanation of the statute's procedural and substantive requirements, the court concluded the debtor did not qualify for "special circumstances" treatment. (20) Citing controlling precedent, the court opined that the canon of ejusdem generis, meaning "of the same kind," required that it "limit the sphere of permissible 'special circumstance' to one's [sic] having such similar traits and characteristics." (21) The court deemed itself bound to "interpret legislatively provided examples of a specific nature as typical of the general category covered." (22) And inasmuch as the deficiency debt failed to approximate the statutorily provided serious medical condition or call to serve, the debt did not ascend to the level of "special circumstances" level. (23) While the court acknowledged that the debtor did not act in bad faith, it nonetheless concluded that the means test barred her resort to chapter 7. The case illustrates a court's hesitance to analogize more "mundane" debts with those of the more serious genre identified by Congress.

      2. In re Burggraf

         In In re Burggraf, the debtors sought to rebut the abuse presumptively arising from their joint chapter 7 case. (24) The debtors produced an above- median income under the means test; they sought to rebut the presumption, citing their immense student loan debt totaling $350,000. (25) The obligation represented the lion's...